5 Simple Steps to Rid Yourself of Debt
Do you find yourself in a cycle of debt – paying minimum monthly balances only to see your debt stay the same – or possibly even increase? If so, you’re not alone. The average American has $38,000 in debt – and that’s not including home mortgages. And while your amount of debt may be higher or lower, you are part of a larger group of people who want to break the debt cycle and become debt free. But where do you begin? Even if your debt seems overwhelming and you feel hopeless – chances are there is a way out. Read on for 5 simple steps to rid yourself of debt.
Step 1) Write Down All of Your Debt
The very first step toward paying off your debt is to know where you stand. Start by making a list of all of your debt. This means everything, from your department store credit card to your mortgage or student loans. No debt is too big or too small. You may find this exercise eye opening if you never really sat down and analyzed your debt before.
Once you have all of your balances written down, also notate the minimum payment and current payment you make, interest rate, due date, and any other important information about the debt. Some people find it helpful to write down what that debt was for. As an example – if you have a store credit card that you used to make an impulse purchase – write down what that purchase was. It will help you in the next step of the plan.
Step 2) How Did You Get Here?
Now that you have all of your debt spelled out in front of you – it’s time to make some assessments and put together a plan. If you look at your list of debt and see credit being used for non-essential, impulse items that weren’t budgeted for, you now know that is an area of weakness for you and you can take steps to correct that in the future.
However, if you realize when looking at your debt that you’re using credit as a means to cover your everyday expenses that your monthly budget can’t cover, you’re living beyond your means and/or not budgeting your money properly. If that’s the case, it’s time to take a look at your budget, assess the shortcomings, and figure out where costs can be cut. Perhaps you have a vehicle that you truly can’t afford. Or maybe you’re living in home with a very high rent or mortgage payment. Once you identify where your budget is being stretched too thin, you can decide if a lifestyle change is necessary – perhaps moving, taking on a secondary source of income, or even getting a roommate.
An important part of this process is to remember to go easy on yourself. For some, debt brings with it a sense of shame or failure, and that doesn’t help you reach your overall goal of being debt free. Use this exercise to learn how you got where you are and learn from it to avoid the same scenarios from happening again.
Step 3) Start an Emergency Fund
An emergency fund is exactly what it sounds like – money that’s put aside for an unexpected cost that is kept separate from your main spending accounts and credit cards and not earmarked for any other expenses. And the best time to start building an emergency fund is before you find yourself in a situation with unexpected emergency costs.
It’s also important to understand what an emergency fund is not. It is not a vacation fund or for regular expenses that should already be a part of your regular budget. If you budget correctly, an emergency fund will be there when a true emergency strikes. Now, it may seem silly to start an emergency savings fund when you’re still in debt – but the opposite is actually true. If you have funds set aside for a true financial emergency, and don’t rely on credit cards, you have prevented yourself from getting into further debt and undoing any progress you’ve made in your journey to become debt free.
Step 4) Start Tackling Those Balances
Now that you have a grasp on your debts, and you know how you got to where you are and have started preparing for financial emergencies – it’s time to start paying down your debt. There are many ways you could decide where to start, but one of the most popular ways to do it and stay motivated is to start with the smallest balance. Once you get that first debt paid off and see that “$0 Balance” on your statement, that is a huge accomplishment. The rush you get will only make you want to pay off even more! From there you take on the next largest debt and so on – adding the payment from the first debt as well as the payment budgeted for the next debt. With each debt paid, you’ll have more money to tackle the balance of the next one.
Step 5) Educate Yourself
The world of credit and financing can be a confusing one – and that is usually intentional on the side of the lender. Marketing professionals make careers out of making credit cards and loans sound like the best thing to happen to you – and when used responsibly they can be leveraged to your advantage. Unfortunately, many people are lured by the prospect of 0% financing, and no payments for many months (or even years) and once that intro period is over, they’re left with a hefty interest payment and a balance that doesn’t get any smaller. If you educate yourself on how much that credit card or loan could end up costing you over the lifetime of paying off the balance, you can be better prepared to walk away from accruing a debt that would have become part of a seemingly never-ending cycle. Only by really thinking hard before taking on any new debt can you truly set yourself up to become debt-free for life.
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